UK Officials Caution That Defined Benefit Pension Reforms May Only Modestly Boost Investment

UK Reforms on Surplus Release from Defined Benefit Pension Schemes: What You Need to Know

In a significant development for the UK pension landscape, the government has announced reforms aimed at simplifying the process of releasing surpluses from defined benefit (DB) pension schemes. These changes, outlined in the Pension Schemes Bill 2025/6, are set to have a profound impact on how surpluses are managed and distributed.

Current Landscape and Proposed Changes

Currently, the rules governing the release of surpluses from DB pension schemes are stringent. Only schemes that passed a section 251 resolution by April 2016 can access surplus funds while the scheme is ongoing. However, the new Bill seeks to remove this requirement and introduce more flexible mechanisms for surplus release.

Under the proposed reforms, trustees will be granted a statutory resolution power to modify their scheme rules. This power will allow them to introduce or amend existing rules to facilitate payments of surplus funds to the employer. This is a significant shift, as it eliminates the need for the specific section 251 resolution and provides more autonomy to trustees in managing surplus funds.

New Conditions and Safeguards

The Bill replaces the current conditions for paying out surpluses with new regulations. One of the key changes is the removal of the express requirement for trustees to be satisfied that the payment is in the interests of members. Instead, trustees will be guided by their overriding fiduciary duties.

Additionally, the need for a written valuation of the scheme’s assets and liabilities will no longer be mandatory, although an actuarial certificate confirming that the relevant conditions have been met will still be required.

Members of the scheme will still need to be notified before any payment is made, and employer consent may continue to be necessary. These safeguards ensure that the interests of both the employer and the scheme members are protected.

Threshold for Surplus Release

A crucial aspect of the reforms is the proposed change in the threshold for surplus release. The government is considering lowering the threshold from the current buyout basis to a low dependency basis. This change is subject to further consultation but is expected to make it easier for schemes to release surplus funds.

According to the new guidance from The Pensions Regulator, in situations where the scheme is likely to remain fully funded on a low dependency basis and there is no realistic risk of employer insolvency, the regulator is unlikely to have reservations about the release of surplus funds.

Impact and Timetable

The reforms are expected to have a moderate impact on the overall surplus funds held by DB pension schemes. According to departmental assessments, the new rules will only extract about 5 percent of the 160 billion pounds in excess assets currently held in these schemes.

The roadmap provided by the government indicates that the changes to the rules around surplus distribution are likely to come into force by the end of 2027. This timeline gives schemes and their trustees ample time to prepare and adapt to the new regulatory framework.

Regulatory Guidance and Moral Hazard

The interplay between the new surplus sharing framework and the existing moral hazard regime is an area that requires clear regulatory guidance. The current moral hazard regime is framed around the buyout basis, which may not align seamlessly with the proposed low dependency basis.

Trustees will need comprehensive guidance to make informed decisions about surplus sharing, and the government has acknowledged the importance of providing such guidance.

Conclusion

The upcoming reforms to the rules on surplus release from DB pension schemes mark a significant evolution in pension regulation. These changes aim to strike a balance between the interests of employers and scheme members, while ensuring the long-term sustainability of the schemes.

As the reforms progress and the detailed regulations are finalised, it will be crucial for trustees, employers, and members to stay informed and adapt to the new landscape.

At Cutts and Co Accountancy, we are committed to keeping our clients updated on these important developments and providing expert advice to help navigate the complexities of pension scheme management. If you have any questions or need guidance on how these reforms might affect your pension scheme, please do not hesitate to contact us.